Unknown Bargain LHT Holdings is Interesting Company

LHT Holdings Ltd is engaged in manufacturing and trading of wooden pallets and timber related products. Its operating segments are pallet / packaging, timber-related products, Technical Wood products and pallet rental and other services.

Established in 1977 as a sawmill in a rural Singapore village, LHT Holdings has been in the timber industry for more than 20 years and it has since grown into one of the leading home-grown manufacturers of wooden pallets and cases for the packing of industrial products in Singapore. LHT Holdings is a real holding company with eight 100% owned subsidiaries: LHT Marketing (Singapore), LHT Ecotech Resources (Tianjin, China), Kim Hiap Lee Company (Singapore), Siri Belukar Packaging (Malaysia), LHT ECR Packaging (Vietnam), LHT Ecotech Resources Pte. (Singapore), LHT GPac Technology (Malaysia) and Lian Hup Packaging Industries (Malaysia).

Making wooden pallets may sound like a humdrum industry. But as we know many times dull business can be a good investment. It reminds me of Nam Lee (boring family own metal products designer and manufacturer from Singapore), which was very profitable net-net for me some time ago.

 

Valuation

Let’s look at the hard numbers first.

LHT’s revenue for the six months period ended 30 June 2018 increased by 11.6% or S$ 2.31 million to S$ 22.27 million as compared with S$ 19.96 million for the six months period ended 30 June 2017.

LHT’s achievements depend largely on its core business of manufacturing and sale of pallets and packaging cases. The ability to increase market share while maintaining profit margin is key to the business.

The sale of pallets and packaging business increased by 20.4% or S$ 3.08 million from S$ 15.10 million to S$ 18.18 million due to higher customer orders in 2018.

The Company also managed to keep its costs well under control. Administrative and other expenses and finance costs all decreased.

LHT’s annual results are not necessarily completely comparable. For example, despite the lower revenue, the Company’s net profit after tax increased in 2017 mainly due to one time gain of S$ 5.61 million arising from the disposal of a leasehold and investment property.

LHT’s share is traded at S$ 0.71 on the Singapore Stock Exchange. It means 4.7 P/E Ratio. EV/EBIT is 2.7 and price to FCF is 8.7. On the other hand, the Company’s ROE is 16.4%, net profit margin 18.7% and dividend yield 7%.

Asset based LHT Holdings is also screaming bargain. Tangible book value is 0.95 SGD and NCAV is 0.71. Company’s net current asset value doesn’t provide much margin of safety, but then again LHT has been a long-time profitable and we should ask whether the Company should be traded at least its book value level.

 

Business Outlook

Two and a half years ago in her interview executive director May Yap explaines how LHT Holdings took a brave step in 2013 and automating the production process at the Sungei Kadut site using assembly machines and an electronic database system. The new technology kept track of inventory and monitored output. This substantially reduced the need for workers to make manual calculations and keep excess stock which made production more efficient.

Since then LHT were able to keep the same team of people but raise productivity. These changes helped push profits up every year from 2013, and more than doubled the output of Company’s staff. LHT Holdings is one firm that has adapted successfully and has been able to turn the Company around from a position where they were losing money to one which are growing over 10% a year over the past five years.

Everything above is positive, but overall market conditions are still challenging. And as we know following the trade war and equity markes sell off global economy is also very uncertain. All that affects LHT Holdings and the Company still have to maintain a cautious outlook and closely monitor costs, because profit margin continues to be under pressure.

 

 Green Company

Today and even more in the future, it’s not bad that the Company makes its business as environmentally friendly as possible. LHT’s commitment to excellence and a greener environment has been recognised with the receipt of many important awards and certifications.

LHT Holdings is committed to protect the Earth’s precious timber resources and reduce waste. In 1997 LHT entered into a purchase contract with a German corporation and purchased a production line at a total cost of approximately S$ 13.0 million in order to develop the company’s wood waste recycling capability. This plant, which was commissioned in March 1999, enabled LHT to convert wood waste to a new product called ‘‘Technical Wood”. The advanced technology allows products to be made with greater consistency in colour and texture and to a higher density. These products undergo a strict process of treatment and drying to prevent wood cracking, mould and insect attacks.

Technical wood pallets provide numerous advantages over timber ones. They are high density, have low moisture content, resistant to pests and have higher consistency of its final products compared with timber products as timber comes with natural inconsistencies and defects. These products are therefore ideal for furniture, building material and heavy-duty industrial usage.

LHT Holdings uses recycled waste wood instead of natural resources to manufacture wooden pallets. The Company utilises waste wood materials from its manufacture of pallets and cases, its wastage and disposal costs may be reduced. LHT also procures waste wood materials from its customers apart from third party waste wood suppliers, thereby solving its customers’ waste wood disposal problem and providing yet another value-added service. In addition to these, biomass-fired cogeneration system isutilised to generate electricity from waste wood, thus reducing its carbon footprint by almost half.

The fact is that LHT Holdings is able to offer a locally produced, green product at a stable price, and of a good quality. That is how they have been able to grow the business.

 

LHT Holdings as an Investment

First, LHT Holdings is cheap and profitable. Not a bad combination. Secondly, owners have the skin in the game. Ex-Managing Director and co-founder Neo Koon Boo is the largest shareholder owning almost 23%, Executive Director and co-founder Tan Kim Sing (with his family) owns just over 18% and CEO and Chairman Yap Mui Kee about 12.5%.

You may also think that ownership is even too focused. It means limited stock float. And even more important, it would be very difficult for an activist investor or any other third party to influence the Company’s decisions. This is one of the most important issue for investor to think about. It’s difficult to find a fast catalyst which removes the undervaluation.

LHT Holdings itself has a lot of positive things like long-term profitability, growth prospects and valuable green values. But the investor must be prepared to wait patiently for the increase of the company’s stock market price. Anyway, there’s not a big risk of permanent capital impairment.

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